Schumpeter

Bumpkin bosses

Leaders of Western companies are less globally minded than they think they are

THE heads of multinational companies like to think of themselves as generals in the globalisation wars. They dream of conquering fresh markets in the East. They boast about the diversity of their armies. And they love to mock politicians for their parochialism: why is Ed Miliband, the leader of the British Labour Party, making such a fuss about Pfizer’s bid for AstraZeneca when the first is run by a Scotsman and the second by a Frenchman?

Which all makes a lot of sense: companies in developed countries do themselves nothing but harm if they fail to think globally. The biggest growth opportunities now are in the emerging world: McKinsey, a consultancy, calculates that people there will buy $20 trillion-worth of goods a year by 2020. So are the biggest threats: China’s Huawei has grown rapidly from an improbable idea into one of the world’s biggest telecoms companies.

But how good are these generals at applying the logic of globalisation to themselves? Pankaj Ghemawat, of Spain’s IESE and NYU’s Stern business schools, calculates that only 12% of the world’s Fortune Global 500—the largest corporations by revenue—are led by a CEO who hails from a country other than the one in which the company is headquartered. (By contrast, almost 50% of the managers of football clubs in England’s Premier League were born abroad.) The figure for firms’ senior management as a whole is 15%. These two numbers are highly correlated: in Fortune Global 500 companies with foreign CEOs, 50% of the management team is foreign as well, compared with only 10% at companies with native CEOs. The proportion of foreign CEOs rises to 30% if you look at the 100 biggest companies, but it quickly falls to single digits if you look beyond the largest 500.

European companies are the most cosmopolitan at the top: 23% of the bosses of European firms on the Fortune Global 500 list are foreigners, as are 28% of the senior managers. North America is just average, with 11% and 13% respectively. Japan comes a dismal third among rich-world countries: only 3% of CEOs and 5% of senior managers are non-Japanese. One of the leading “foreign” CEOs, Han Chang-Woo, of Maruhan, moved to Japan from South Korea in 1945 at the age of 14.

There are good reasons to think that leaders will become even more parochial in the future. Western companies are finding it harder to recruit “high potentials” in emerging markets. Two decades ago they had the field to themselves. Today they have to compete with fast-growing local companies and constantly confront the question, “Why should I work for a company that is run by people who look like you when I could work for one which is run by people who look like me?” Western firms are also cutting the number of people they send abroad: according to one study the proportion of expats in senior-management roles in multinationals in the biggest emerging markets declined from 56% to 12% between 1998 and 2008. And the Europeans and Americans are making poor use of those people: another study shows that staff who do a spell abroad take longer to move up the organisation than people who stay at headquarters. In other words, go-getting executives do better to spend their time politicking at central office than acquiring experience abroad.

Why does this matter? The obvious reason is that, in a globalising world, parochialism at the top can impose huge costs, in terms of reduced creativity, missed opportunities and cultural blundering. A growing body of research suggests that mixed teams are more likely than homogeneous ones to come up with creative solutions. Native CEOs tend to surround themselves with senior managers who resemble them. They are also more likely to fixate on a “native solution” to a strategic problem than to consider other options: Germans look to mechanical engineering for answers, Britons favour the financial sort.

Mr Ghemawat argues that C-suite parochialism helps to explain the relatively unimpressive performance of Western multinationals in emerging markets. Bain & Company, a consultancy, looked at the performance of 92 Western firms with listed subsidiaries in such markets. These companies increased their profits there by an average of 15% a year between 2005 and 2010. But comparable local companies boosted their profits by 23% a year.

McKinsey calculates that companies headquartered in emerging markets grew roughly twice as fast in those markets as those headquartered in developed economies—and two and a half times as fast when both were competing on “neutral turf” in the emerging world. Given that traditional multinationals have better-established brands and longer histories as global companies than emerging rivals, a good deal of the difference must be explained by superior local knowledge.

Hit the road

How can multinationals avoid the evils of bumpkinism? One way is to move managerial functions to other parts of the world. Procter & Gamble relocated its global cosmetics and personal-care unit from its Cincinnati headquarters to Singapore. General Electric’s health-care division is moving the headquarters of its X-ray business from Wisconsin to Beijing. Jean-Pascal Tricoire, the boss of France’s Schneider Electric, has posted himself to Hong Kong. A second technique is to bring the rest of the world to headquarters. Bertelsmann posts successful local managers to bucolic Gütersloh in western Germany for a couple of years. Daimler-Benz has decreed that half the participants in its programmes for young high-flyers must come from outside Germany. A third technique is to give people from the rich world more opportunities to travel: IBM and FedEx encourage their executives to provide consulting to emerging-world subsidiaries. It is always tempting to think that multinational companies are cosmopolitan by nature; in fact, they have to work hard at debumpkinising themselves.